Working towards natural capital accounting and integrated reporting by financial institutions Vicky Beukes, Social and Environmental Risk Manager , Nedbank

Chair of NCD Working Group 4: Disclosure & reporting

Natural Capital Declaration and Roadmap

Integrated Reporting and natural capital

Steps towards accounting for and reporting on natural capital

Understanding and disclosing natural capital linked to

portfolios

NCD Working Group 4 work plan for natural capital disclosure

and reporting

Q&A

Agenda

Natural capital and financial institutions

• NC is the stock of ecosystems that yields a renewable flow of goods

and services that underpin the economy and provide inputs and

benefits to businesses and society (e.g. food, fibre, water, energy,

timber, climate security).

• Companies depend and impact on natural capital through extraction

and production.

• Over-exploitation of natural capital will cause growing price volatility

and business constraints across the world economy.

• Financial institutions are exposed indirectly through loans,

investments or insurance.

• Growing need to address exposure to risks from natural resource

constraints and pollution issues embedded in financial products.

• Finance-led, CEO-endorsed initiative to mainstream natural

capital in loans, bonds, equities and insurance, as well as

accounting & reporting.

• Focus on the global financial sector: banks, institutional

investors, fund managers, insurance firms, who are working

alongside supporter organisations.

• Jointly managed by UNEP FI and Global Canopy Programme

• Launched at Rio+20 in June 2012.

• 45 financial institution signatories.

About the NCD and Roadmap

NCD signatories (October 2013) www.naturalcapitaldeclaration.org

NCD supporters (October 2013)

Outline of objectives for implementation 2013-2016

• Signatory financial institutions are working to understand, embed,

account for and report on natural capital factors by 2020.

• Aim to strengthen management of risks and opportunities and

increase resilience of financial products (e.g. investments, loans).

• Developing systematic and structured approaches to address natural

resource, pollution and climate change challenges.

• Working Groups will develop practical guidance, methodologies,

tools, frameworks and indicators to build capabilities for signatory

financial institutions to implement the NCD commitments.

NCD Roadmap and Business Plan

4 working groups for 4 commitments

Working Group NCD commitment

1. Understand Build understanding of risks and opportunities linked

to impacts and dependencies on natural capital

through operations, supply chains and portfolios.

2. Embed Develop methodologies to integrate natural capital

considerations into financial products and services

3. Account Develop methodologies to incorporate natural capital

into accounting by financial institutions.

4. Disclose/report Develop guidance for natural capital disclosure and

reporting using an integrated approach.

Secretariat

UNEF FI, GCP

NCD Steering Committee

WG Chairs, Supporters

NCD Advisory Network

Information Providers,

GOs, Scientific

Community

WG I

Understanding

Impacts/Dependencies

Chair: Rabobank

Project Manager

KPMG

Project Manager

CDP

WG II

Embedding NC in financial

products

Chair: Banorte

WG IV

Natural capital

disclosure/reporting

Chair: Nedbank

WG III

Natural capital accounting

Chair: National Australia

Bank

Project Manager

Natural Value Initiative

Project Manager

Global Canopy Programme

Governance NCD Seek multidisciplinary

knowledge and expertise

by inviting non-financial

organizations to become

supporters or join advisory

network.

www.theiirc.org

NGOs

Companies

Investors

Accounting

Standard setters

Regulators

Chair: Prof Mervyn King CEO: Paul Druckman

Who is the IIRC?

IIRC

PILOT PROGRAMME

BUSINESS NETWORK

INVESTOR NETWORK

Prototype Framework

The Journey so far...

Discussion Paper

Emerging <IR>

Database

Behaviour

Change

Summary of

comments

Background

Papers

PP Yearbook

Discussion Paper

Prototype Framework

December 2013 The Framework

Framework (2013)

The Journey so far... …and ahead

Emerging <IR>

Database

Behaviour

Change

Summary of

comments

Background

Papers

Pilot Programme

Yearbook

2014 Work Plan

Value creation process

Value creation process

Natural capital

Social and relationship

capital

Human capital

Intellectual capital

Financial capital

Manufactured capital

Financial capital

Manufactured capital

The capitals

Natural Capital Declaration: bringing natural capital accounting

and integrated reporting together

A NAB case study

Name Surname Business Unit

Date Month Year

Rosemary Bissett Enterprise Risk 30 October 2013

Insert business unit name

Insert presentation title

Materiality process

High

Low Potential impact to business High

Medium

Low

High

Imp

ort

an

ce to

sta

ke

hold

ers

Framework for Materiality

• Uses annual benchmarking, research

and a variety of stakeholder feedback

mechanisms to refresh and prioritise

our CR Issues Map

• Materiality assessment framework

helps prioritise issues based on

potential impact on our business and

significance to our stakeholders

• Assessment guides the content of our

annual reporting and is an input to

current and future strategic planning

• KPMG ensure our materiality process

is robust and independently reviewed

• Environmental impact of our operations

• Managing exposure to environmental risks

• Responsiveness to environmental market

opportunities

Insert business unit name

Insert presentation title

Our reporting journey

2004 – began publishing a stand alone CR Review

2009 – better message and data alignment

between CR Review and Shareholder Review

Asked ourselves why two documents?

2010 – first integrated Annual Review, using

guidance from PwC and Accounting for

Sustainability

2011 – joined the IIRC pilot (one of 4 Australian

companies)

2013 – producing 4th integrated report and 2nd in

line with draft IIRC guidelines

Insert business unit name

Insert presentation title

Integrated reporting – rationale

One Report allows us to:

• illustrate who we are as a company and

how culture and CR are a fundamental

part of how we do business

• bring together material information about

our business so we can better articulate

how we create and sustain value for our

stakeholders

• create a single source of truth – helping

our shareholders and stakeholders to

find the information they require

• reporting more effectively and efficiently

Insert business unit name

Insert presentation title

Supplemented by…

Dig Deeper Papers

Series of web-based reports providing

greater detail in each of our commitment

areas.

GRI Index

Insert business unit name

Insert presentation title

Our environmental agenda

CLIMATE CHANGE (2007) • Developing products and services

• Understanding risks and opportunities

• Sharing our experience with others

• Engaging and assisting our people

RESOURCE EFFICIENCY (2010)

• Improving resource efficiency

• Continuing employee engagement and

developing positive environmental behaviours

• Embedding sustainability into purchasing

decisions

NATURAL VALUE (2011)

• Building thought leadership

• Considering risk and revenue dependencies and

hardwiring into business decisions

• Engaging our people

• Building product and service responses

• Developing tools and valuation methodologies

One of two inaugural

signatories in 2011

Insert business unit name

Insert presentation title

Our approach….

Learning by doing….

• Operational reporting (GHG Protocol Scope 3 standard) and

targets

• Work with Trucost and others

• Equator Principles and internal ESG risk reporting

Making

External

Connections

Building our

understanding

Taking

leadership

Risk

Management

Embedding in

Operational

Decisions

Business

Change

Insert business unit name

Insert presentation title

Reporting practices: from…

From simple reporting on greenhouse emissions from energy

use……

2003 Annual Report

2004 Corporate Responsibility Report

Insert business unit name

Insert presentation title

To …..

Modelled on PwC’s Typico report

Chair: Rosemary Bissett, National Australia Bank

Project Manager: KPMG Australia

Working Group 3 aims to build capacity for financial institutions to meet

the NCD commitment to:

“Work towards building a global consensus for the

integration of Natural Capital into private sector

accounting and decision-making; supporting, when

appropriate, the related work of the TEEB for Business

Coalition, and other stakeholders.”

NCD WG 3: Accounting for natural capital

Current developing implementation plan for 2014-2016

1. Phase 1: Mapping study to identify approaches, techniques, tools

and initiatives to account for natural capital in financial statements.

2. Phase 2: Create detailed work plan to develop methodologies to

quantify natural capital across portfolios and in financial accounts.

3. Phase 3: Develop and test methods for financial institutions to

account for natural capital in reporting.

Consultative approach engaging NCD signatories and

supporters (E.g., Nedbank, BBVA, Rabobank, ASN Bank,

Kenya Commercial Bank, ACCA, TEEB for Business, GRI,

WBCSD) and other experts in accounting, portfolio

measurement, natural capital and environmental economics.

Draft work plan for Working Group 3

Lauren Smart Executive Director Trucost

NATURAL CAPITAL ACCOUNTING & REPORTING The challenges to approaching natural capital accounting in financial services products and services

THE LINK BETWEEN NATURAL & FINANCIAL CAPITAL

Source: Trucost analysis; H&M, Gap & Fast Retailing; Factset data

Cotton Prices & Pre-Tax Profit Impact

-130%

-110%

-90%

-70%

-50%

-30%

-10%

10%

30%

50%-50%

-30%

-10%

10%

30%

50%

70%

90%

110%

130%

150%

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

Cotton price (LHS) % YoY

Retailers' pretax profit impact(lagged 18 months; RHS) % YoY

YEAR

CO

TTO

N P

RIC

E %

Yo

Y

PR

ETA

X P

RO

FIT

IMPA

CT

% Y

oY

2008 – Hurricane Gustav and Texan drought. Yield -8%

2010 – China’s drought. Yield -13%

2011 – South central and southwest USA drought. Production -13%

FTSE Commodity Exposure Index: Concealed Commodity Risk

Figure 1: Sector Ranking on average change in earnings with a 10% increase in commodity prices

STARTING POINT: IDENTIFYING MATERIAL RISK AREAS

For Financial Institutions Investments are where the risk is

IDENTIFY SECTORS/ REGIONS OF EXPOSURE

CASE STUDY: LUXURY GOODS COMPANY - RISK

WEIGHTING WATER EXPOSURE

PROJECT FINANCE Deep Analysis at Project/Investment Level

0

5000

10000

15000

20000

25000

30000

35000

GHG Water Land Use

Nat

ura

l Cap

ital

Co

st $

mn

Natural Capital Cost per mn$ capital

Scenario 1 Scenario 2 Scenario 3

Investment of $xmn in Freeland Cattle Farm in Clarens, Kwazulu Natal, South Africa

Integrate regionally specific & business specific analysis

Environmentally adjusted IRR

Integrated Fundamental Valuation Equity Research

True Return on Capital

when externalities

priced in

• Project Finance

• Equity Research

Source: Trucost analysis ‘FTSE 350 Commodity Exposure Index’

PORTFOLIO EXPOSURE TO WATER SCARCITY COSTS

LOAN BOOK WATER EXPOSURE Country Analysis

REPORTING NATURAL CAPITAL RISK RBS – Energy Financing Report

Chair: Vicky Beukes, Nedbank (South Africa)

Project Manager: CDP

Working with the NCD Secretariat to develop work plan for 2014-16

Natural Capital Declaration commitment

Working Group aims to support implementation of commitment 4:

“Collaborate, when appropriate, with the International Integrated

Reporting Committee (IIRC) and other stakeholders to build a global

consensus around the development of Integrated Reporting, which

includes natural capital as part of the wider definition of resources

and relationships key to an organisation’s success.”

Approach to implementation

The program will be implemented on a voluntary basis with the goal

of developing capacity building and general internal benefits within

financial institutions.

Working Group 4: Disclosure/Reporting

WG4 Draft work plan: Scope and Activities

• To ‘investigate how to increase the level of transparency, disclosure

and external reporting about the use of natural capital within

operations and the ‘value chain’ of financial institutions’.

• To develop a disclosure programme and guidance to build capacity

of financial institutions to report primarily on their indirect use of and

effect on natural capital.

• To focus on the financial ‘activities’ of FIs, focusing on exposure to

natural capital as providers of financial products and services (loans,

investments, insurance).

WG4 Draft work plan: Output and structure

• Questionnaire for disclosure on natural capital together with

guidance to support implementation of reporting.

• Disclosure programme for natural capital.

• Guidance on how financial institutions can disclose material natural

capital-related information linked to their business operations,

including portfolios, in an integrated way in their primary reports. E.g. Annual Reports & Accounts.

• Work stream 1: Disclosure

• Research and development to enable and promote appropriate

disclosure by financial institutions on their exposure to natural

capital through financial ‘activities.’

• Work stream 2: Natural capital in Integrated Reporting by FIs

• NCD and CDP to work with the Climate Disclosure Standards Board

(CDSB) to develop guidance on including natural capital information

in financial reports in the context of Integrated Reporting.

Next steps

• Consultation with NCD signatories and supporters in WG4.

• Finalise work plan with Steering Committee.

• Fundraising to deliver work plan.

QUESTIONS www.naturalcapitaldeclaration.org www.theiirc.org

THANK YOU www.naturalcapitaldeclaration.org www.theiirc.org